If you’ve mastered this area of investing, you’re better off than 92% of Americans…

According to a recent survey by BNY Mellon Investment Management, a staggering 92% of Americans didn’t know what fixed-income investing is. And this survey didn’t factor in younger Americans… This was a survey of a couple thousand adults.

The results were scary…

Fewer than one out of 10 respondents could correctly define fixed-income investing. About 30% believed it was intended only for your retirement.

And nearly half had no clue about the right time to add exposure to fixed-income investments.

Now, don’t feel bad if you’re in the same boat… But especially in today’s market, you absolutely need to learn what these investments can offer you.

I’ve long said that fixed income should be a staple in any investor’s portfolio.

And that’s because diversification among asset classes is essential…

Fixed-income securities are designed to pay a regular stream of income over a fixed period of time. You lend money to a corporation or a government, and at the end of the bond’s duration (at “maturity”), you get back your initial investment (called the “principal”), plus interest.

You can choose from many different fixed-income investments… from municipal-bond funds to preferred stock (a sort of half-bond, half-stock security) to corporate bonds.

For most investors, bonds sit somewhere between boring… and a godsend. The promise of interest payments and an almost-certain return of capital – at a fixed rate for a long period of time – will let you sleep well at night.

Plus, holding safe fixed-income securities in your portfolio is a simple way to stabilize your investment returns over time. For people with enough capital, locking up extra cash (after you’ve saved six to 12 months of your expenses) in fixed income is a great way to generate much more cash flow than money-market or savings accounts, which typically pay next to nothing.

But one of the main reasons to have some money in safe bonds is to offset volatility from the stocks you own…

Over time, you’re likely to make money in stocks. But it’s not always a smooth ride. The chart below shows how far the market dropped from its peaks during various drawdowns over the years…

As you can see, stocks fall 20% and 30% from highs with regularity. They can even fall 50%.

Bonds have their drawdowns, too. But the most drastic declines are around 6%…

In other words, bonds also fall… But if you are used to stocks, you’ll never lose a moment’s sleep over your bond portfolio.

Now, a question I’m sure a lot of folks struggle with is this: How much of my portfolio should be in bonds?

This answer depends on your tolerance for risk… and your age.

When you’re younger, you can afford to take on more risk and try to earn higher returns. This means you can put more money in stocks. But you should still have at least 10% in fixed income as a baseline.

As you get older and more focused on capital preservation – versus appreciation – putting more money in bonds makes sense.

The diagram below should help you understand what to expect…

By viewing the range of simple allocations between stocks and bonds, you can see that a 100% stock portfolio has returned 10.3% a year since 1927 – but with substantial risk. On the other hand, a 100% bond portfolio has returned 5.4% a year – with little risk. Only 14 out of 92 years had a loss.

And a more balanced portfolio of 60% in stocks and 40% in bonds returns a healthy 8.8% a year, while reducing the worst loss from 43.1% to just 26.6%. Take a look…

If you don’t have any of your portfolio in fixed income, I suggest you do it now… especially in today’s volatile market. The returns from bonds aren’t going to blow you away, but consistently getting a check from the government or a company is a great feeling.

A simple “one click” way to get exposure to safe corporate bonds is through the iShares iBoxx Investment Grade Corporate Bond Fund (LQD)…

LQD holds more than 1,000 U.S. investment-grade corporate bonds of some well-known companies like Verizon (VZ), JPMorgan Chase (JPM), Microsoft (MSFT), and Apple (AAPL). These are all big, sturdy companies that should have no trouble paying off their obligations – even during a recession.

We can’t know how much further the market will fall before it hits bottom. But we’ll likely see more pain ahead… And if that’s the case, you’ll be happy to collect income checks from your fixed-income investments.

Here’s to our health, wealth, and a great retirement,

— Dr. David Eifrig

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Source: Daily Wealth